Either can help you avoid taking on debt in an emergency
Some people just call their emergency fund their rainy day fund. No matter what you call it, these funds are there to cover the unexpected: car troubles, job loss, medical bills and more.
Emergency fund vs. rainy day savings
Some people use the terms emergency funds and rainy day funds interchangeably, but some experts (including myself) have different definitions.
- An emergency fund is savings designed to cover long periods of financial difficulty. It should have enough cash to pay for three to six months of your essential living expenses.
- A rainy day fund can be considered savings for minor expenses, usually around $1,000 to $2,000. This isn’t enough to sustain you for months on end, but it is generally enough to cover one-time expenses that could hurt your monthly budget.
Separating your emergency fund from your rainy day fund is completely optional — but having at least one can really save the day in a financial crisis.
When to use an emergency fund vs. a rainy day fund
The idea behind separating your emergency fund and rainy day fund is giving yourself limits and sorting your cash into categories to prevent dipping into your emergency fund for non-emergencies. An easy way to think about the separation is urgency, cost, and safety. Knowing those answers can tell you when to use your emergency fund or your rainy day fund.
A rainy day fund is great for small, one-off expenses, including:
- Replacing small appliances, such as a microwave
- Fixing a blown car tire
- Copays on doctor visits
- Last-minute gifts you didn’t account for.
An emergency fund is best used for non-optional, large issues, such as:
- Job loss
- Long-term medical leave
- Expensive home repair, such as a furnace or central air conditioning
- Sudden flight or travel for a family emergency
How large should my emergency fund be?
A typical rainy day fund ranges from a few hundred dollars to around $2,000 at the high end. Since it isn’t designed for long-term issues, a few hundred dollars in that fund should be enough of a cushion for small expenses you didn’t plan for.
However, an emergency fund should have around three to six months of essential living expenses. The number might be large — such as $10,000 or even $100,000 — but don’t let that scare you. Saving for an emergency fund is a long-term goal, similar to saving up for retirement.
Make your emergency fund goal actionable and attainable. If you can save $200 per month, you’d end up with $10,000 after about 50 months. If you saved $500 each month, you’d meet that same goal in about 20 months.
Bottom line
Think of a rainy day fund as your first line of defense for your regular budget and your emergency fund as a last resort.
Emergency funds should be used for financial crises that seriously disrupt your life or safety for long periods, like losing your job, a major health issue, or a critical home repair, such as a new furnace in winter.
For either savings type, consider placing your funds in a high-yield savings account so the balances grow passively and are protected by federal deposit insurance.
